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Is there an Exclusionary Effect of Retroactive Price Reduction Schemes?

  • Lisa Bruttel

    ()

    (Department of Economics, University of Konstanz, Germany)

This paper presents an experiment on the loyalty enhancing effect potentially created by retroactive price reduction schemes. Such price reductions are applied to all units bought in a certain time frame if the total quantity passes a given threshold. Close to the threshold, the marginal price the buyer pays for the missing units up to the threshold is very low. A dominant firm can use this effect to exclude potential rivals from competition, which is why some jurisdictions consider retroactive discounts as unlawful. This study shows that there in fact is a loyalty enhancing effect of retroactive discounts and how it relates to risk preferences and loss aversion.

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File URL: http://www.wiwi.uni-konstanz.de/workingpaperseries/WP_21-Bruttel_2013.pdf
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Paper provided by Department of Economics, University of Konstanz in its series Working Paper Series of the Department of Economics, University of Konstanz with number 2013-21.

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Length: 22 pages
Date of creation: 31 Aug 2013
Date of revision:
Handle: RePEc:knz:dpteco:1321
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  1. Douglas D. Davis & Edward L. Millner, 2005. "Rebates, Matches, and Consumer Behavior," Southern Economic Journal, Southern Economic Association, vol. 72(2), pages 410–421, October.
  2. Frank P. Maier-Rigaud, 2005. "Switching Costs in Retroactive Rebates – What’s time got to do with it?," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2005_3, Max Planck Institute for Research on Collective Goods.
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  7. Steffen Andersen & Glenn W. Harrison & Morten I. Lau & E. Elisabet Rutström, 2008. "Eliciting Risk and Time Preferences," Econometrica, Econometric Society, vol. 76(3), pages 583-618, 05.
  8. Dohmen Thomas & Falk Armin & Huffman David & Sunde Uwe & Schupp Jürgen & Wagner Gert G., 2009. "Individual Risk Attitudes: Measurement, Determinants and Behavioral Consequences," Research Memorandum 039, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  9. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
  10. Davis, Douglas D. & Holt, Charles A., 1994. "The effects of discounting opportunities in laboratory posted-offer markets," Economics Letters, Elsevier, vol. 44(3), pages 249-253.
  11. Uri Ben-Zion & Yuval Cohen & Ruth Peled & TAL SHAVIT, 2007. "Decision-Making and the Newsvendor Problem – An Experimental Study," Working Papers 0711, Ben-Gurion University of the Negev, Department of Economics.
  12. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  13. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
  14. Hans Normann, Bradley Ruffle and Christopher Snyder, 2004. "Do Buyer-Size Discounts Depend on the Curvature of the Surplus Function? Experimental Tests of Bargaining Models," Royal Holloway, University of London: Discussion Papers in Economics 04/01, Department of Economics, Royal Holloway University of London, revised Apr 2004.
  15. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  16. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November.
  17. Maurice E. Schweitzer & Gérard P. Cachon, 2000. "Decision Bias in the Newsvendor Problem with a Known Demand Distribution: Experimental Evidence," Management Science, INFORMS, vol. 46(3), pages 404-420, March.
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